Negotiated price of services

Negotiations of price, if rational, require a number of considerations:

• intrinsic price is the actual value of the product for the buyer and represents either the costs saved from doing it inhouse, or the costs available from other suppliers of the same product
• risk premium is a premium that the buyer is prepared to pay in addition to the intrinsic price to avoid risk that the alternative solutions are not as good or won't solve the problem
• convenience premium is a further premium that the buyer is prepared to pay because the 'ready made' solution is easier for him to buy than it would be for him to buy elsewhere or do inhouse
  
• speed premium is the benefits that the buyer gets from having the service working and in place quicker than other solutions
• transaction cost is the opportunity cost from having to run negotiations, plus the real cost of things like lawyers
• vendor relationship cost is the added cost of having to manage the relationship with a third party. This can range from the cost of dinners to the opportunity cost from managing the relationship once purchased
• vendor risk cost is the opposite of the risk premium, and represents the cost of the product not achieving the goals, either because the product is not as described or not fit-for-purpose, or because the vendor becomes unable to deliver in the future (e.g., bankruptsy)

The point of information in this equation is to quantify all of these items. A rational buyer makes an assessment of all of these items and needs information, which brings us into the value of information. A vendor, on the other hand, wants to create a perception that the greens are as big as possible, and the oranges as small as possible.

How is this achieved?

Most sales folk focus on the intrinsic cost, which for a well-defined market or a costly product may well be the bulk of the cost. A good sales person will also cover the other bases too.